Paying for infrastructure – learning from others

The economics of infrastructure funding is a fascinating subject, particularly when we observe how it varies from one country to another. How to select projects from the dozens that compete for public favour? By what criteria are they deemed worthwhile and prioritized? And, most critically, how are those selected to be financed?

On my travels I was struck by the brilliance with which so many cities present themselves to visitors. First impressions cover far more than glitzy angular downtown skyscrapers. They include museums, galleries, waterways, monuments and public transport, especially its comfort, efficiency and cost. How is open space used for recreation? How are commercially functional activities, from harbours to high streets, softened to entice visitors to relax over a quayside cup of coffee or glass of chilled sauvignon?

who could put a price on the creation of this wonder of 20th century architecture?

Take Sydney, of the world’s most beautiful cities. The magic of its waterfront perimeter, from Darling Harbour, round Circular Quay to the Botanic Gardens and Opera House, did not just “happen”. It represents many years of transformation from vision to reality, at massive cost. The original budget for the Opera House, back in 1957, was A$7 million. The fraught gestation from idea to icon culminated in its grand opening in 1973, by which time its cost had mounted to A$ 102 million, funded as it happens by a special opera house lottery. But who could put a price on the creation of this wonder of 20th century architecture? Who could put an economic value on the spiraling benefits it has yielded to Sydney’s community, local government and, ultimately, the Australian exchequer?

Incalculable benefits

What measure would you use? Comparative tourist data? Cruise liners queuing at the port? Transport utilization statistics? The only barometer infallibly capable of yielding hard economic data is the rise in land prices and rental values. And here, of course, lies the clue to the most natural provision of infrastructure finance. The government of New South Wales saw the light many years ago. It collects an annual property tax (from which private residences are exempt) based on land values over a pre-set threshold. The value on which the tax is assessed relates to just the land – buildings and other structures on the land are ignored. There is therefore a huge incentive to improve properties. Adding buildings or refurbishing has no effect on the tax.

It is in the nature of every major infrastructure project to enhance life in the community, and this is axiomatically reflected in increased commercial land values. In this way projects are made to pay for themselves. The only disincentive the tax creates is to speculate in land by hoarding it -, for the owner is liable for the tax regardless of whether the land is occupied. There are no gaps in the Sydney skyline!

Other countries continue to grapple with these questions. New Zealand’s superb highways, for example, are paid for piecemeal by an illogical combination of methods, including public/private partnerships and, increasingly, by tolls levied on road users. Although this has superficial logic it is deeply resented: after all, the beneficiaries of the highway system are not limited to the carriers that use them. Local government rates, based on rental values, are too dim a reflection of the immense community wealth generated by the transport system.

Hong Kong has long recognized that the benefits of leading the world in cutting-edge construction technology for building highways, bridges, tunnels, airports and mass transit systems easily outweigh initial infrastructure costs, which are comfortably funded from levies on resulting incremental rental values. Japan and China too base their property taxes on notional rental values. But it seems that only the Australian model has the key ingredient of not taxing improvements.

The common theme: rents always rise to reflect infrastructure enhancement, and a tax based on this allows capital expenditure programmes to become virtually self-funding – a principle well understood, but never implemented, in Britain. What a vote-winner that would be!